Daily Agenda: Investors Debate a Bottom for Commodities

Glencore woes keep basic materials at the forefront of risk narratives; Chinese PMI indicates large manufacturers are faring better than smaller; the world’s largest pension fund chases yield.

Glencore Plc Headquarters

A man walks from the reception area at the Glencore Plc headquarters in Baar, Switzerland, on Wednesday, Sept. 30, 2015. Glencore Plc wiped out Monday’s record slump as the shares rose for a third day alongside higher metals prices. Photographer: Alessandro Della Bella/Bloomberg

Alessandro Della Bella/Bloomberg

The sharp decline in commodity prices in the first three quarters of the year continues to reverberate through financial markets and the global economy. Mining giant Glencore has transformed into something of a poster child for the difficulties facing raw-material producers after wild swings in its stock and bond prices bled over into broad-market sentiment this week and the former high flyer scrambled to offload assets to shore up its balance sheet. Glencore’s stock declined by almost 30 percent on Monday only to rebound in three subsequent sessions. With a dependence on short-term financing for liquidity and a credit rating tied to the price of depressed base metals, the Baar, Switzerland–based company faces a crisis of confidence that is also affecting forward guidance of companies indirectly tied to commodity production, such as Peoria, Illinois-based Caterpillar. In the midst of this turmoil, some investors appear willing to wager that a bottom has been reached. On Thursday, New York alternative-asset stalwart KKR & Co. announced it was expanding its stake in Australian copper miner OZ Minerals, driving that company’s stock nearly 20 percent higher for the session in Sydney.

PMI shows divergence of fortunes in China. Final September PMI data suggests that recent liquidity efforts by policymakers have boosted prospects for larger, state-owned companies more than their private-sector counterparties so far. National Bureau of Statistics manufacturing purchasing managers’ index levels registered at 49.8 in September versus 49.7 in August and flash readings of 49.6, with an increase in the new orders sub-index that bodes well for coming months. The Markit Caixin manufacturing PMI report released today indicated that small and mid-sized companies had a rougher go of it for the month, with the headline index slipping to 47.2 from 47.3 in August, a marginal improvement over the flash reading.

M&T acquisition of Hudson City wins approval, finally. Yesterday the Federal Reserve approved the acquisition of Hudson City Bancorp by Buffalo, New York–based lender M&T Bank Corp. for approximately $5.4 billion in stock and cash. M&T’s attempt to win approval has been a saga that began in 2012 and involved delays caused by increased regulatory scrutiny brought on by legislation in the wake of the credit crisis.

Japan’s government pension fund chases higher yield despite risks. Japan’s $1.2 trillion Government Pension Investment Fund today announced a series of new allocations into riskier segments of the fixed-income markets abroad, adding a dozen new managers. The move comes despite concerns over the effect of increasing benchmark rates in the U.S. as the pension fund, the world’s largest, seeks higher yields after decades of low returns from Japanese government bonds.

Fed Insider trading probe. The Wall Street Journal, citing anonymous sources, reported yesterday that federal prosecutors in New York and regulators at the Commodity Futures Trading Commission had separately opened investigations into possible insider trading in advance of Federal Reserve announcements in 2012. The New York research firm Medley Global Advisors is reportedly the focus of scrutiny.

U.S. oil supply increases sharply. Weekly crude oil inventory figures from the Energy Information Administration released Wednesday indicated a net increase of 4 million barrels versus consensus forecasts of an expansion of only 100,000. Stockpiles of gasoline also surprised analysts with an increase of 3.3 million barrels. This rise in supply comes despite a reduction in Baker Hughes’ weekly rig count on Monday, bringing current levels to fewer than half the wells in production a year ago.

Dealmaker to launch IPO. PJT Partners, a firm combining boutique investment bank PJT Capital and the M&A and reorganization-advisory groups of New York’s Blackstone Group, is expected to seek an initial public offering on Thursday after trading on a when-issued basis for over a week. Blackstone investors will receive shares in the new company.

Portfolio Perspective: Calculating the Cost of Cheap Money — Peter Boockvar, Lindsey Group

As their models tell them, the Federal Reserve simplistically believes that artificially low interest rates is a boost to growth and higher interest rates are an impediment. After a near seven-year economic recovery best described as mediocre, let’s take the other side of its thesis and look to the negatives of zero rates. 1) As artificially low interest rates only pull forward behavior, there is always a hangover on the flip side. 2) Free money encourages excessive credit growth and leverage which eventually leads to slower growth and bankruptcies when the inevitable economic slowdown comes. 3) Savers and retirees are the sacrificial lambs who are forced to bail out the over-indebted at the cost of their own standard of living. 4 ) Misallocations of capital and malinvestment are inevitable outcomes of the cost of money being disconnected from the supply and demand of it. 5) Following No. 4, excess capacity will always result, which then a hangover always follows (point No. 1). This was seen with fiber optics in the 1990s, housing in the mid-2000s and oil-gas just recently. 6) While the cost of financing the purchase of a new home is cheap, it is driving home-price growth above income growth and pricing families out of the market. 7) It creates a zombie economy where poor companies are not allowed to die, thus creating excess capacity and an inefficient use of capital. 8) It is this excess capacity that also ultimately inhibits capital spending, which we’ve seen a sluggish investing pace for years now.

Peter Boockvar is a managing director and the chief market analyst at The Lindsey Group in Fairfax, Virginia.